What’s a fixed interest rate home loan?
A fixed-rate home loan is a loan with a set interest rate, paying a set repayment amount each month for a set term.
Fixed home loan interest rates may be considered predictive. In given terms, borrowers look at the expense of keeping money at a specified rate for a given period of time at a set interest rate.
In particular, if borrowers assume rates to increase, a fixed rate option will typically be stronger than variable rate and vice versa if consumers expect rates to decrease.
If a borrower has chosen a fixed rate on their residential mortgage, it’s typically an indication they expect the variable rate to increase beyond the rates they have settled in.
Lenders can provide fixed rates from 1 and 10 years; nevertheless, majority of fixed-rate deals are between one and five years with 2 and 3 years being the more commonly chosen.
What is Variable interest rate on the home loan?
The variable interest rate of a Borrowers home loan fluctuates in line with the Reserve Bank Cash rate.
The Reserve Bank uses the cash rate as a flippant device to try to handle economic growth – when economy is growing too fast (generally when the financial system has been doing excellent) the exchange rate generally rises; when the financial system is eroding (economic growth is slow), the exchange rate has often been falls to stimulate expenditure and spending.
What are the advantages and disadvantages of fixed rates of home loans?
Advantages of fixed-rate home loans:
- Loan payments will not increase if interest rates increase.
- Gives ease of mind to borrowers worried about rate rises
- Enables for more accurate budgeting
- Taking advantage of the lower rates.
Disadvantages of fixed-rate home loan:
- Loan payments do not decrease if rates fall
- Are restricted to making extra payments ( with majority of the banks)
- Early termination fee applicable if fixed rate term is broken.
What are the advantages and disadvantages of variable rates of home loans?
Advantages of variable rate home loan:
- Banks Standard Low Deposit Home Loans allows you to make extra repayments with no penalties
- Unrestricted redraws on any additional repayments you have made
- Enjoy full interest offset advantages when you open an Everyday Offset account
- Allows you to shop around to refinance for a better rate.
Disadvantages of variable rate home loan:
- Your payments increase when rates increase.
- It can be more difficult to prepare for the future because you cannot be certain how interest rates will go forward.
What are the break fees?
When you take up a fixed rate option and you’re looking to turn it back to a variable rate home loan or terminate your loan application before the fixed term expires to refinance to another bank or selling your home, you will be penalised for breaking the fixed-rate term loan agreement. These costs are recognized as break payments, premature repayment modifications, or financial costs to the bank.
Warning: Break charges can be quite high as its calculated differently everyday at a different rate. The earlier you break your fixed term contract, the more costly it can be. As the funding for these products are through Bonds.
Many lenders these days will ask you to sign an declaration form if you fixed your loan to confirm you understand the risk of taking up such product.
How much are you supposed to fix?
You must try to determine how much you are going/plan to pay off your residential mortgage over a fixed-rate period or at least deposit the funds into your offset account, and then hold that section of your loan variable. This helps you to create additional returns on the variable rate section without risking any charge for a break fee as you will be minimising the interest payable and also allow you to pay down the loan faster.
How long are you meant to fix for?
The longer you fix your loan, the stronger the premium you pay for the safety of the fixed interest rate. Sometimes it may work out and sometimes it may not.
Many individuals select their fixed-rate term depending on what they think the direction of interest rates will be, and when they anticipate their situations or desires to alter, Generally the most common is 2 or 3 years fixed loan products.
What is a Rate Lock?
Generally, an approval will have an expiry date of between 60 – 90 days at the time your loan is approved (but not settled) dependent on which bank, if the fixed rate reduces that time, you might be eligible for the lower fixed rate. however, if consumers believe fixed rates are about to increase before their loan settles and their approval is approved at a lower fixed rate, they may want to pay a once off non refundable fee to lock in the original lower fixed rate as this could better off in the long run, paying a once off fee rather paying a higher rate over the next few years during the fixed period. Cost of this fee varies from lender to lender. Best investment home loan rates